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Corporate China hits global debt market milestone

Chinese companies have borrowed more money from the international bond market than from domestic investors so far this year, breaking with tradition as authorities in Beijing focus on curbing capital outflows.

Banks and other corporate borrowers have been quietly encouraged to raise money offshore in other currencies, limiting the need for Chinese companies to sell renminbi to finance overseas investments. Borrowing more outside the mainland also allows for the possibility companies will remit some of the cash back home, bolstering the Chinese currency in the process.

Led by banks and property developers, corporate China has raised $26.1bn from offshore bond sales compared with $21bn at home, according to Dealogic. Chinese companies have also been prompted to seek foreign-based funding by the higher interest rates policymakers have introduced this year.

Banks have long been among the most active in raising money in other currencies to support expansion overseas. This month the Hong Kong units of Bank of China and ICBC tapped investors for $4bn in two, three-year dollar-denominated deals, while China Construction Bank’s European arm raised €500m.

The flood of deals beyond the mainland also suggests a measure of corporate confidence that China has the renminbi’s depreciation under control, bankers say, since borrowers’ liabilities would increase sharply if the currency were to plunge.

Last year the renminbi weakened by 5.8 per cent against the dollar in offshore markets and 6.5 per cent onshore. So far in 2017, the offshore rate has gained 1.7 per cent as the dollar’s rally has paused.

“There is a combination here of China encouraging borrowing offshore and people making judgments that the depreciation story may not be as severe as they thought,” said CG Lai, head of global markets for Greater China at BNP Paribas.

Mr Lai added that the early-year uncertainty over the direction of Chinese interest rates also damped domestic activity as borrowers and investors faced tighter monetary conditions than expected. The People’s Bank of China surprised markets by tightening a series of money market rates after the week-long lunar new year holiday.

“January was extremely uncertain but people are now more comfortable that China is not changing its policy to ‘tight’ straight from ‘easy’, but is more neutral,” Mr Lai said.

However, those jitters were enough to push onshore yields significantly higher, with three-year corporate bonds averaging 5.56 per cent so far this year compared with 4.63 per cent in the last three months of 2016.

Bankers do expect corporate China’s borrowing patterns to revert to type, with borrowing in the mainland outstripping foreign activity.

One banker said: “This is temporary because the onshore bond market is experiencing something of a market correction with a significant shift in the yield curve. Over time we would expect the trend to revert to normal.”

Limited participation by foreigners in China’s onshore bond markets mean the two funding pools do not often compete directly, leaving corporate borrowers with international credibility able, in theory, to tap whichever is better for them.

China’s property developers have proved particularly nimble in turning to offshore funding sources this year after regulators curbed their ability to borrow domestically as part of efforts to cool a booming market.

Brock Silver at Kaiyuan Capital in Shanghai said: “China’s developers are completely dependent on debt to drive growth. Rather than see pipelines implode, they’ve simply switched to dollar debt. Fundamentally, they’ve solved an immediate-term liquidity crisis by accepting higher intermediate-term currency risk.”

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